With all the drama surrounding Facebook’s ill-fated initial public offering earlier this year, investors may well have overlooked the second-largest IPO of 2012: a Malaysian company called Felda Global Ventures Holdings, the country’s largest maker of palm oil, which raised $3.14 billion in June.
Malaysia also supplied the year’s third-largest IPO in hospital operator IHH Healthcare, which raised $2 billion. In late August both stocks closed more than 10 percent above their IPO prices, and Malaysia’s stock index had gained more than 11 percent for the year.
While doom and gloom hover over Europe and sluggish conditions continue in the U.S., Malaysia’s booming equity market shows that Asia’s fund managers have found pockets of growth amid the generally negative forecasts for their region.
“There are still plenty of opportunities for anybody who isn’t myopic and can stand back from the temporary stuff,” says Hugh Young, who heads Aberdeen Asset Management Asia, in Singapore. “In bits and pieces, the markets have been vibrant.”
Of course, Asia-based managers have faced numerous challenges in the past 12 months, including slowing regional growth, weaker corporate profits and a repatriation of emerging-markets assets as institutional investors pulled their money out of the region in favor of seemingly safer domestic markets. Still, Asia’s 100 biggest asset managers had grown their funds under management to $13.8 trillion as of March 31, representing growth of 5.8 percent from 12 months earlier, according to the 2012 Asia 100, Institutional Investor’s annual ranking of the region’s leading asset management companies.
Managers have increased their assets despite a deteriorating outlook for the global economy. Uncertainty about the extent of the slowdown is expected to continue in the coming months as Asian businesses bear the impact of softening global demand and slowing growth in China. And while equity markets in Southeast Asia have performed strongly this year, the largest equity markets in the region — including China, Japan and Taiwan — have underperformed. The MSCI All Country Asia Pacific index gained 2 percent in the 12 months to August 22, compared with 25.8 percent growth for the U.S. benchmark, the Standard & Poor’s 500 Index. The Shanghai Composite Index lost 17 percent in the year to August 22 and had shed one third of its value from its two-year highs. “Although the market looks cheap on valuation grounds and China has continued to enjoy economic growth, performance has been disappointing,” says Julie Koo, head of the Asia-Pacific institutional business at HSBC Global Asset Management, which oversees $75 billion.
“The world looks pretty miserable,” adds Aberdeen’s Young. “The short-term outlook for Asian equities is downbeat, and on the bond side yields are expected to be relatively low.”
Although yields are indeed at historically low levels, Asian bonds, particularly corporate and government debt, remain a bright spot for the region. The GBI-EM Global Diversified Index of local currency bonds issued by developing country governments had returned 9.8 percent this year through August 13, according to JP¬Morgan Chase & Co., which compiles the index.
“Asian bond markets represent an unusual mix of good credit quality, yields which are generally higher than in the developed world and the chance to invest in sovereign and corporate bonds where economic growth remains strong,” says Geoffrey Lunt, senior product specialist for fixed income at HSBC Global Asset Management.
Asia’s vigorous bond markets reflect the underlying strength of the region — relatively healthy public finances, strong current accounts, high levels of monetary reserves and undervalued currencies — even as local companies grapple with slowing top-line growth. China, the region’s biggest economy, is forecast to grow by 8 percent this year, according to a July estimate by the International Monetary Fund, while Southeast Asian economies are expected to grow by 5.4 percent, on average.
“Asian markets over the past 12 months have been victim to what’s happened in Europe and to some extent the U.S.,” says Bernard Reilly, head of Asia-Pacific for State Street Global Advisors, which oversees $402.2 billion in assets, $27 billion more than last year. “Asian companies look favorable and should outperform their U.S. and European counterparts once you see some degree of stability.”
Debt issues in Asia-Pacific, excluding Japan, reached a record-high $487.8 billion in the first half of the year, a 27 percent increase over the first six months of 2011, according to data provider Dealogic. U.S.-dollar-denominated bonds totaled $101 billion in the period, also a record. Pacific Investment Management Co.’s dedicated emerging-markets local bond business has grown by more than $25 billion over the past five years, says Ramin Toloui, global head of emerging markets at Pimco. The Newport Beach, California–based fund manager oversees $160.7 billion in the region, up $10 billion from last year. The GDP-weighted Pimco Global Advantage Strategy Bond Fund, which is one-third invested in emerging markets, has grown by more than $10 billion, Toloui says.
Institutional investors are looking to the region’s longer-term demographic changes, led by Asia’s breakneck urbanization, which is creating a fast-growing middle class. In China, average per capita disposable income for urban residents increased to 21,810 yuan ($3,445) last year, up nearly fourfold from 2000. Between 1980 and 2010, Asia added more than 1 billion people to its cities, while another billion are expected to be added by 2040, according to the Asian Development Bank.
Fund managers from developed markets are expected to help fuel Asia’s next growth cycle by allocating more money to emerging markets, which are underrepresented in most market-cap-weighted benchmarks, say fund executives. Pimco’s Toloui thinks emerging markets can expect major inflows in the coming years as investors come to grips with the fact that they are underallocated to these areas. Emerging countries presently account for 34 percent of global GDP and almost 70 percent of global growth, but they make up only 4 percent of investor equity portfolios in the U.S., he notes.
Some investors are already redeploying their holdings. Norway’s giant sovereign wealth fund, Government Pension Fund Global, announced earlier this year that it would move to a GDP-weighted allocation of its global bond portfolio. Norway was the biggest buyer of South Korean bonds in July, according to Seoul government statistics.
A survey of 14 fund managers, including Franklin Templeton Investments and AllianceBernstein, indicated fund managers may be shifting more assets to emerging Asia. The survey, published in July by HSBC’s wealth management arm, represents about 17 percent of global managed funds, or $4.36 trillion. Forty percent of respondents said they were overweight on Asia-Pacific ex-Japan for this quarter, compared with 25 percent in the second quarter.
Foreign shareholdings amount to less than 1 percent of the total capitalization of the Shanghai Stock Exchange, but that could soon change. In April, Beijing announced it had raised the quota for the qualified foreign institutional investor program, the main vehicle foreigners can use to buy Chinese stocks, by $50 billion, to $80 billion. “This is an important signal to institutional investors that the regulator in China wants more foreign investors to participate in the domestic Chinese market,” says Raymond Chan, chief investment officer for Asia-Pacific at Allianz Global Investors in Hong Kong. In the meantime, many fund managers, including AGI, continue to use offshore funds, such as the Allianz China Equity Fund, to buy Hong Kong–listed equities of leading mainland companies like China Mobile and Cnooc.
Finding value in Chinese equities or in regional investment may take some time, and that presents greater challenges for fund managers, says SSgA’s Reilly. “Investors are settling in for the long haul,” he explains. “They are becoming far more used to volatile markets and are focusing more on their objectives.” • •